GST-led shift from informal to formal sector happening, but at a snail’s pace

Now that it’s been more than a year now since GST was announced and most teething troubles are out of the way, has the much-talked about formalization happened?

That the goods and services tax (GST) will be a game changer for the formal economy was perhaps the most promoted feature of the new tax regime in the run-up to its implementation. It was expected that lower effective taxes, along with increased compliance, would accelerate formalization, and organized businesses would gain share and tax collections would surge.

Given the significant presence of unorganized firms, sectors such as plywood, ceramic tiles, pipes and batteries for the aftermarket, to name a few, were anticipating a major demand shift to the formal sector.

Now that it’s been more than a year now since GST was announced and most teething troubles are out of the way, has the much-talked about formalization happened?

“Commentaries by managements of companies in these sectors so far indicate that the unorganized segment continues to have a reasonable market share and the transition from unorganized to organized segment is yet to materialize,” said Shamsher Dewan, vice president (corporate sector ratings) at Icra Ltd.

Temporary staffing firms such as TeamLease Services Ltd and Quess Corp Ltd too were seen as key beneficiaries. But not much has changed for them either. “Formalization of workforce in India, which is 90% unorganized, will take a few more quarters to manifest in a bigger way on account of GST as during the first year of implementation, companies were grappling to understand the law. However, with recent changes on the procedural front, we expect the pace of shift in demand from unorganized to organised temporary staffing to accelerate,” said Rituparna Chakraborty, co-founder and executive vice president at TeamLease.

“As for Teamlease, we have seen organic growth in the general staffing business but that was largely on account of expected and usual uptake of demand. GST has not been a major contributor at least so far, in terms of boosting our market share. That said, we remain optimistic of benefiting from the GST-led shift in demand in the subsequent quarters,” added Chakraborty.

Also, the e-way bill, which was implemented in May this year, is yet to yield the desired results allegedly due to the weak surveillance by the government.

In a post-June quarter earnings conference call with analysts, Abhishek Somany, managing director of Somany Ceramics Ltd, said, “Fake e-way bills are being generated, you pay ₹200 and you’ll get a fake e-way bill in Morbi. We are saying until the systems don’t improve at the various checkpoints where the e-way bill can be ratified, I don’t think much is happening there. Enforcement is the key issue here. I don’t hope to gain market share this year.” Morbi district in Gujarat has India’s largest cluster of ceramic tile makers.

Some tax experts said on condition of anonymity that ideally, steps should be taken to boost GST revenue collections but since this a pre-election year, stricter scrutiny measures to plug loopholes are unlikely.

On the other hand, adhesive maker Pidilite Industries Ltd has seen GST-led market share gains in the June quarter. Also, the management commentaries of fast-moving consumer goods company Marico Ltd and decorative paints maker Asian Paints Ltd indicate they are hopeful.

“We have observed in the 1980s and 1990s when excise duty was reduced considerably in the organized sector, demand shifted gradually from the unorganized to the organized sector to an extent, so it’s very difficult to talk of months-to-months deviation, but over a period of time, we definitely see a movement from the unorganized to the organized sector,” said K.B.S. Anand, managing director and chief executive of Asian Paints Ltd.

In short, despite anti-tax evasion measures, the shift to the formal economy would be a long-drawn process and companies may have to wait a few more quarters to benefit from it.



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